The recent COVID-19 crisis has made remote work a necessity for many companies. However, there may be some tax implications that could end up being quite complex for many business owners. The problem arises when a remote working employee lives in another state then technically he or she is considered work in that state. This presents a problem as to which states have a right to tax the company and how much of the business’ net income that the state can claim.
If a business has enough economic activity in multiple states due to factors such as sales and then suddenly employees working from that state, this could cause the company to have a sufficient presence to tax any of its activity. The official term for this used in tax law is nexus. Companies that only sell their products in another state are protected by federal law from being taxed based upon nexus and maybe you’ve enjoyed this in the past.
If you are a multi-state business, doing business across state lines, or suddenly find yourself in a new situation due to remotely working employees, you may need to figure out how much each state can tax your net income. This is called apportionment. The share of a company’s net income is determined through an apportionment formula. Many states just focus on sales under a single sales factor apportionment. However, in a three-factor state, the amount of payroll in a state (as a share of activity in all states) helps determine how much income is taxable, thus, employees working from home can increase apportionment.
Nexus and apportionment correlate with one another. For example, a company that has regular sales in a state but lacks nexus, that company has no corporate income tax liability to that state. However, if a company also has employees that live in that state and work remotely, the state could begin taxing them taking all of the sales in that state into account to determine its share of net income to tax based upon apportionment.
Running a business is hard enough, but when the complexity of unexpected remotely working employees is added to the mix, taxation can get even more confusing. To help you navigate these new potential tax liabilities contact Potts & Company.